In the old days of paper spreadsheets, tax returns, and publications, the Internal Revenue Service would provide guidance to tax preparers and taxpayers before the start of tax season, which would be used as guidance throughout the year. As a result of the digital age, the IRS has increased its capabilities, allowing them to streamline this guidance with their website. The website has provided substantial benefit, allowing taxpayers to track their refund, amended return, or even reviewing transcripts of what the IRS has on file. However, this streamlined process also allows the IRS to provide guidance and change guidance with the click of a mouse. This means that guidance for your return may differ if it was prepared in February versus if it were prepared in April. What the IRS does not understand is the cost to the taxpayers, as they are the ones that pay for these changes, whether it be from their preparer changing a completed return or a possible audit arising from inconsistency in the return. These costs can be substantial, and a prime example is the Form 3115 and tangible property regulations during this last tax season.

Many of you probably heard us warning everyone about the Form 3115 this tax season. In case you do not remember, the Form 3115 was an IRS initiative resulting from their final regulations with respect to tangible property. Around this time last year, the IRS released final regulations that changed the way taxpayers are allowed to expense certain items. More specifically, these new regulations changed what had to be capitalized (expensed over multiple years) and what could be written off in the year of purchase. The biggest challenge with the new regulations is that by adopting them, a taxpayer is changing his/her method of accounting. The only way to properly change a method of accounting with the IRS is by filing Form 3115. The IRS estimated that Form 3115 would take the average person approximately 24 hours to prepare after learning about the new laws. In order to better accommodate our clients, we quickly restructured our processes to provide this form for a fee. After enough research and development, we reduced the preparation time from the IRS estimated 24 hours to anywhere between a half hour to two hours, depending on the complexity.

The American Institute of Certified Public Accountants (AICPA) fought the IRS for several months on the additional requirement of filing Form 3115. Their advocacy started from the release of the final regulations in October 2014, and continued all the way through the middle of tax season, when the IRS finally agreed to relieve smaller businesses of the requirement to file Form 3115. On February 13, 2015, the IRS released Revenue Procedure 2015-20, which allowed smaller businesses to adopt the new regulations as of January 1, 2014 without having to file Form 3115. The decision provided major relief for many smaller taxpayers, but only at a cleverly hidden cost.

The biggest cost of Rev. Proc. 2015-20 is that taxpayers do not receive the audit protection for prior years that the Form 3115 offered. This means that the IRS can audit prior years and argue that a taxpayer did not comply with the new laws, even if the laws did not exist at the time. The only way to receive the benefit of the audit protection was by filing a Form 3115, which we strongly advised for many of our clients with substantial activity. In addition to informing everyone at the beginning of tax season through our newsletters and packets, we examined each client’s prior year depreciation schedules and tax returns on a case-by-case basis to determine if Form 3115 was essential for the audit protection.

Another major cost is that Revenue Procedure 2015-20 allows taxpayers to adopt the new regulations on a prospective basis as of January 1, 2014, but does not allow a taxpayer to go back for any prior year deductions. For this benefit, we also examined each client’s depreciation schedule to determine if there were any hidden deductions under the new law, and then weighed our fee for the form(s) versus the benefit of the deduction. If someone could receive $300 in tax savings, but would pay $600-$800 for multiple forms, we did not see the form as a cost savings to the client.

Lastly, Rev. Proc. 2015-20 did not allow the adoption of the new removal cost option, which allows the immediate deduction of removal costs during renovations, large repairs, improvements, etc. As with the other determinations, we examined past client records to determine if this change might be a major factor, or if the form was even necessary. The removal cost benefit might not even be necessary if there were not any apparent removal costs in past year returns, as a taxpayer cannot change a method of accounting that he/she has not yet implemented.

Overall, the Form 3115 was a large factor this year for both preparers and taxpayers. The AICPA finally convinced the IRS to provide some relief. After much negotiation with between the two parties, the resulting Revenue Procedure 2015-20 was not entirely a relief. With all of the costs and forgone benefits, we acted as duly diligent accountants and advised many of you of the consequences of these new laws.